Take Control of Farm Financials

01:35PM Apr 09, 2019
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'How did you go bankrupt?' Bill asked. 'Two ways,' Mike said. 'Gradually and then suddenly.' This passage from Ernest Hemingway, in “The Sun Also Rises” could be used to describe the financial challenges farmers are facing today.

Nearly six years of lows profits are taking their toll. The average net farm income forecast for the next decade is $80 billion, according to USDA. For 2018, net farm income was $66 billion, which compares to a peak of $134 billion in 2013.

How does that translate to conditions on the farm?

  • 1-in-10 crop businesses are in a highly leveraged situation, which is defined as debt-to-asset ratios of higher than 0.40, according to USDA.
  • Rural Midwestern bankers expect 18% of grain farmers to have their expenses exceed revenue for 2019, according to the March 2019 Rural Mainstreet Index. Additionally, 83% of bankers are restructuring loans to help financially stressed farmers.
  • Today’s number of bankruptcies per 10,000 farms is 2.35, which is lower than the 3 bankruptcies seen in the 2010-2012 period.

These numbers may seem low, but many farms are teetering on the edge of profitability and business sustainability. These are uncharted waters, as the challenges farmers are facing today are much different than the 1980s, says Nate Franzen, president of the agribusiness division at First Dakota National Bank in Yankton, S.D.

“In the 80s, land values fell, and we had a quick correction,” he says. “This time it is really a grind.”

Franzen says around 60% of his bank’s farmer clients are making money, while 40% are losing money. 

“The folks we’re worried about have been in that 40%-loss group for three or four years,” he says. “They are depleting working capital and have already done a restructure to try to replenish working capital. There are people out there with equity, but they are having a heck of a time cash flowing.”

As farmers have faced lower income, many have taken on higher amounts of debt. The chart below shows as farm income has fallen over the past few years, farm equity has also fallen. But farmland values are helping to keep equity up. 

2019 debt by category
“With low commodity prices, farmers have increasingly tapped into their real estate equity to provide operating funds,” reported Robert Johansson, USDA Chief Economist at USDA’s 2019 Agricultural Outlook Forum. “Today, total debt is approaching record levels in real terms, and real estate debt has reached a record high in 2018.”

“Agriculture is in a cash-flow decline, not an asset decline,” says David Kohl, professor emeritus of agricultural finance at Virginia Tech University. 

Farmland values continue to defy gravity in many regions of farm country. Reports from the Federal Reserve Banks, universities and real estate groups continue to point to stable or slightly softer prices. 

These strong land values have been a way for some farmers to increase working capital, Kohl adds. “They have put assets up for sale to get cash,” he says. “Since 2013, passive and indifferent managers have refinanced up to three times. Sometimes having a lot of equity in land can make you passive in management.”

Franzen says the farmers who are surviving and even thriving in the current economic climate have what he calls a strong “Management IQ.”

“Smart farmers are financially savvy, really know their numbers and understand the key indicators of success in their operations,” he says.

How can you increase your management expertise to work through challenging circumstances? Franzen encourages farmers to:

  • Manage your business throughout the year, not just when you make your plan at the beginning of the year. 
  • Be nimble and flexible enough to make adjustments quickly. 
  • Use good data to make decisions. 
  • If something isn’t working, figure out how to stop the bleeding fast.
  • Focus on what you can control.

“Sometimes the worst mistakes are made in the best of times,” Franzen says. “You may have grown beyond your management ability, but you can build that skillset.”

Also, try to stay positive during this down cycle. “Never equate your self-worth with your net worth,” Kohl says.

Surround yourself with positive people, he suggests, and invest in yourself with exercise, a good book, moments of reflection and time off the farm. Also, find a way to give back to a charity or those less fortunate than you.

And remember, Kohl says, good times don’t last forever and neither do bad times.

Read More
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